Tax benefits from company cars

Most OECD member countries treat only 50% of the personal benefit to employees from company cars as taxable.

In situations where employers cover fuel expenses, this favourable tax treatment creates an incentive for employees to use company cars for personal use, and to drive longer distances than they might do otherwise.

This inevitably causes negative fiscal, environmental and social impacts: including more air pollution, traffic accidents, congestion and noise, as well as increased greenhouse gas (GHG) emissions contributing to climate change. In OECD countries, the environmental and other social costs were estimated at EUR 116 billion . This amount is significantly higher than the estimated tax expenditure (EUR 26.8 billion in 2012): the loss to society is thus far greater than the gain by a few “winners”.

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Four main conclusions can be drawn about company car taxation and the environment:

Current company car tax rules increase distance driven. Favourable tax treatments increase both the number of cars driven as well as the distance driven per car per year.

Increased driving resulting from company car tax rules harms the environment, due to its disproportionate impact on total distance driven.

Non-taxation of distance driven (as opposed to the capital component) is the most harmful feature of most company car tax systems, both environmentally and socially.

Ending the under-taxation of company cars, particularly that of the "distance" component, would therefore considerably improve environmental outcomes across the OECD.